Ian A. MacKenzie and Markus Ohndorf, School of Economics Discussion Paper No. 485 August 2013, School of Economics, The University of Queensland. Australia.


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We investigate the efficiency of Coasean bargaining when transfers between agents are capped. We model a two-stage Coasean environment where, in the first stage, property rights are costly to attribute. After the attribution stage agents voluntarily exchange over the level of harm. If property rights are attributed via an all-pay auction, then the introduction of a cap is Pareto improving. Using a Tullock contest we find a cap is Pareto inferior, but may increase Kaldor-Hicks efficiency. Applications include the analysis of tort law.